#### Question

Financial information for Forever 18 includes the following selected data:

$\begin{matrix} \text{(\ in millions)} & \text{2018} & \text{2017}\\ \hline \text{Net income} & \text{\ 129} & \text{\ 308}\\ \text{Dividends on preferred stock} & \text{\ 20} & \text{\ 15}\\ \text{Average shares outstanding (in millions)} & \text{150} & \text{400}\\ \text{Stock price} & \text{\ 12.02} & \text{\ 10.97}\\ \end{matrix}$

1. Calculate earnings per share in 2017 and 2018. Did earnings per share increase in 2018? 2. Calculate the price-earnings ratio in 2017 and 2018. In which year is the stock priced lower in relation to reported earnings?

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#### Step 1

1 of 4

We are going to use following claims:

\begin{align*} &\boxed{\text{EPS} = \dfrac{\text{Net income- Preference dividend}}{\text{Average outstanding shares}}} \\\\ &\boxed{\text{Price earnign ratio}=\dfrac{\text{Stock Price }}{EPS}.} \end{align*}

Let's work out our problem: In our case, in 2017., net income of company is $\ 308$ million.

The company paid dividend of $\15$ milion on preferred stocks. Outstanding shares of the company is $400$ milion and stock price is $\10.97$.

Then, in 2018. , net income of company is $\ 129$ milion. The company paid divident of $\ 20$ milion on preferred stocks. Outstanding shares of the company is $150$ milion and stock price is $\ 12.02.$.

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